Comment by max51
2 days ago
The "circular investment" is mostly start up companies using their stocks instead of cash to pay for server hardware and cloud computing. There is a few extra steps in between that make things look weird and convoluted, but the end results is really just big companies giving hardware and getting shares of ai companies in exchange for it.
I think you’re just describing how it’s circular.
It’s like Toys R Us not having enough money to pay Mattel for Barbie dolls and telling Mattel they can have partial ownership of the company if they just supply them with some more toys.
But the problem is that Toys R Us is spending $15, 20, or maybe even $50 (who knows?) to sell a $10 toy.
Toys R Us continues selling toys faster and faster despite a lack of profit, making Mattel even more dependent on Toys R Us as a customer. It blows up the bubble where a more natural course of action would be for Toys R Us to go bankrupt or scale back ambitions earlier.
Because it’s circular like this, it lends toward bigger crashing and burning. If OpenAI fails, all these investors that are deeply integrated into their supply chains lose both their investment and customer.
> But the problem is that Toys R Us is spending $15, 20, or maybe even $50 (who knows?) to sell a $10 toy.
It's like how Uber and Airbnb in the early days were burning loads of cash to build market share. People went to these services because they were cheaper. Then they would increase prices once they had a comfortable position.
OpenAI is also in a rapidly transforming field where there are a lot of cost reductions happening, efficiency gains etc. Compared to say Uber which didn't provide a lot of efficiency gains.
A little bit, but the scale is another magnitude higher. I just saw a chart yesterday that shows Uber burning $18B, Tesla burning $9B, and Netflix burning 11B before reaching profitability. Open AI so far spent $218 Billion.
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> It's like how Uber and Airbnb [...]
I disagree. It's like Uber and Airbnb in how they try to gain market share. Big difference: For Uber (and when it got big, basically everybody I know has used it once in a while) and Airbnb, you oaid for each transaction. With OpenAI, most peopme are on the free tier. And if there is something incredibly hard, it's converting free users to paid users. That will, IMHO, be the thong that blows (many) of the AI companies up. They won't ever reach a profit/loss-equality.
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Uber and Airbnb have network effects. You cant increase price when there is no cost in switching.
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> OpenAI is also in a rapidly transforming field where there are a lot of cost reductions happening, efficiency gains etc.
But also ever increasing quality requirements. So we can't possibly know at this point if this is a market with high margins or not.
And unlike Uber and Airbnb, OpenAI has no way to maintain marketshare. It’s a domain name with no moat.
Google has to pay Apple billions of dollars to make Google.com the default search engine. I just looked it up, over 15% of search revenue goes to pay to be the default search engine.
Every Android device defaults to Gemini.
Every Microsoft device defaults to Copilot.
I’d love to see where these cost reductions are. If costs are going to decrease rapidly why does OpenAI’s spending plan look so insane?
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Where are the cost reductions exactly? Except for using AI hype as an excuse for layoffs. Can you showe a reference? Genuinely interested.
This is a common misconception
OpenAI and others are already profitable on inference (inference is really really cheap)
They are just heavily investing into the latest frontier
The biggest risk is whether they can stay cutting edge, or if open source or others will catch up quickly.
> OpenAI and others are already profitable on inference (inference is really really cheap)
If it's that cheap I'll soon be doing it self-hosted, or switching to a local provider.
It's a race to the bottom for tokens-providers.
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If you need to do the latter to be able to make money on the former, then you're not making money. Because if the latter requirement would disappear, inference margins would also drop.
>inference is really really cheap
cough Sora cough
At the end of the day, they're still burning cash. Even if inference is cheap, it's also not hard to compete on. They aren't going to be a trillion dollar inference company.
Eventually there will be a race to the bottom on inference price to the customer by companies that aren't trying to subsidize their GPU investments.
OpenAI is spending money because they think they need to for their business to survive. They're hoping that the next big breakthrough just requires more compute and, somehow, that'll build them a moat.
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OK, so absolutely good faith here what is the end game?
Obviously, there’s a scenario of super power AI and then it’s a matter of continuing course. Electricity and silicon.
What if you are right, and the scaling doesn’t work. It is too much power, time, hardware to improve… does openAI fold?
Do they just actual use the models they have?
Does everyone just decide that AI didn’t work and go back 5 years like it didn’t happen?
Does the price change so that they have to be profitable making AI services expensive and rare instead of today where they are everywhere pointlessly?
Or does this insane valuation only make sense with information you don’t have like insider scaling or efficiency news?
Does China’s strategy of undercutting US value of models pay off bigly?
Why so extreme, most likely just AI winter for a while, then when tech and societies has caught up, the advancements begins again.
It is not like we threw away the dotcom advances, they were just put on hold for a while..
Growth decoupled from labor costs
The people running these companies have a perverse incentive to keep the ball rolling as long as possible so that they can extricate as much personal wealth and influence as possible. Maybe AGI makes all the problems go away. But, failing that, they get out relatively scot-free when it all collapses. And they don't owe anything to the public. And no one is going to bring them up on fraud charges or any other kind of criminal charges. So, while the world is burning around them (including their former companies), they have the money and connections to acquire property and businesses that are actually productive. It's the Russian oligarch playbook. They're the kings of a struggling society on the brink of failure, but they heard "kings" and said, "Let's go."
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Cisco did this in 1999. That's how my smallish apartment building in Sweden ended up with a kick-ass Cisco 10 Gbps switch in its basement a year later - when these cost real money.
I think the HOA still only pays like $10/month/apartment for an entry level that's now defined as 250/250 Mbit/s. Someone must have been unusually savvy with the contracts.
https://newsroom.cisco.com/c/r/newsroom/en/us/a/y1999/m11/ci...
Cisco survived but it took them until late last year to recover their 1999 stock value (that's 26 years).
Nope wrong framing.
Nvidia is investing assets into OAI - it has to. Because OAI needs to become successful for Nvidia's story in the long-term to play out, to justify its current stock price.
You say calling it circular is wrong framing and the immediately proceeded to describe a circle.
Nvidia just needs the winner to be an Nvidia customer. OpenAI is replacable.
If OpenAI folded, you’d have the one LLM company that consumers know suddenly gone. Which seems like the opposite of an AI success story.
People will start looking at valuations more carefully. Investors will get jittery. Spending on GPUs will drop, as will NVidia’s stock price.
I’m not sure that NVidia views OpenAI as replaceable.
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Customers comparable to openai are trending towards designing and/or using their own silicon, though.
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